Price Discrimination A2 Economics

Aims and Objectives Aim:  To understand price discrimination. Objectives:  Analyse a cartel.  Describe the advantages and disadvantages of cartels.  Examine price discrimination in practice.  Analyse price discrimination using economic models.  Evaluate the reasons why firms price discriminate.

Independent Schools Running a Cartel.  Guardian Article

Starter: Cartels, For and Against  Case for and against cartels  Two teams  5 mins prepare  5 mins argue

Wal-Mart and Price Discrimination in the USA

Price Discrimination  Price Discrimination: ‘Firms charging different prices to different customers based on differences in the customers ability and willingness to pay.’

Price Discrimination  Customers who are prepared to pay more are charged a higher price than those only willing to pay a lower price.

Perfect Price Discrimination  Occurs when a firm charges each customer the maximum price the customer is prepared to pay.  Customers end up with zero consumer surplus.  All transferred to seller of good as extra profit.  Outcome close to perfect price discrimination occurs with customers and street sellers.

Monty Python Perfect Price Discrimination

Gatecrasher Traffic Light Party: Price Discrimination  Nightclub divides it’s market into male and female customers.  Each with a different elasticity of demand at each price of admission.  Diagram. (Price discrimination when a firm charges different prices to two groups of customers).

Gatecrasher Traffic Light Party: Price Discrimination  At all the prices that could be charged for entry to the club, female demand is more elastic than male demand.  Females, are less enthusiastic about going to the club.  Female demand is more elastic than male.  D=MR is twice as steep as D=AR.  MC when an extra person enters the club is the same. (Vertical MC Curve).

Gatecrasher Traffic Light Party: Price Discrimination  Profit Maximise: MC=MR in both male and female markets.  Men pay a higher price of P M.  Women pay a lower price of P F.  Q M males are allowed into the club.  Q F females are allowed into the club.

Gatecrasher Traffic Light Party: Price Discrimination  Different prices charged result from the different male and female price elasticities of demand.  Note that the last MR received from the last man and woman admitted are the same.

Conditions For Price Discrimination  Must be possible to identify different groups of customers. Possible when customers differ in their knowledge of the market.  At any particular price, the different groups must have different elasticities of demand.  Markets must be separated to prevent seepage. Seepage takes place when customers buying in one market at a lower price resell in another market at a price which undercuts the oligopolists own selling price.

Why do firms price discriminate?  Diagram (Price Discrimination and the transfer of consumer surplus).  Price discrimination allows firms to increase profit by taking consumer surplus away from consumers and converting it into supernormal profit.  Shows combined market with the male and female D=AR curves added together.  D=MR added together.  MC curve slopes upwards to reflect law of diminishing returns.

Why do firms price discriminate?  In the absence of price discrimination all consumers pay the same price (P CM ).  Without price discrimination consumer surplus is shown by the shaded area labelled (1).  But with price discrimination when males are charged P M and females are charged P F, consumer surplus falls to the areas marked (2) and (3).  Firms’ profit has increased by transferring consumer surplus from consumer to producer.

Plenary:  Define price discrimination.  Team teach each other the diagrams and explanations of the diagrams.